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Wednesday, November 09, 2011

The failings of unconstrained liberal democracy

There is literally no excuse for newspapers and news broadcasters not to be filled to the brim with substantive global news. However, as there is always trivia about celebrities, sports and the fetish for disaster porn, these will always come first, yet 2011 is becoming one of those years that may go down in history as marking a turning point. It is a time when critical decisions are needed by elected politicians, most of whom are not really up to the job. The difficulty comes from the nature of liberal democracy.

It takes a certain type of person to stand for elected office. At best they are well educated, have benign intent (in their eyes), are willing to take advice, and will carefully weigh up the options before choosing policies that appear to generate more good than harm. In fact, that's what voters by and large expect.

What people get is something else. Despite the ravings of tabloid media and talkback radio, political office in and of itself doesn't pay well for the hours that politicians are expected to put in. That is, if you're professional or entrepreneurial. However, if you're Georgina Beyer, Ken Livingstone, Alamein Kopu, George Osborne, Jack Elder, Diane Abbott, Danny Alexander or Jami-Lee Ross (yes go read up on them to see what genius is behind them), then this is the pinnacle. You're unlikely to be earning that much doing anything else. If you want more, you need to be at best planning your future career (consider Simon Power), or to be corrupt.

Your first and biggest concern as a politician is getting elected, which means telling people what you think they want to hear. It is an exercise in marketing, and to be fair most voters are either loyal customers of a single party (and so uninterested in results, but act tribally), or make the decision based on hunches and feelings, or single policies that tap their emotions. The number of voters who thing of the long term, and use any combination of economic or scientific analysis (even flawed) to decide who to vote for is insignificant, and engaging with those who do, one on one, is a waste of any politician's time. Avoiding conflict and avoiding difficult decisions is what they do, because to do so means upsetting people, and those are people you need for support.

The Eurozone crisis is entirely because of that factor. Politicians in Greece, Italy, Spain, Portugal and other European countries promised voters a lot of "free" things, whether it be healthcare, education, pensions, welfare, housing, or at least lots of cheap things. They offered more, year in year out, they promised more, spent more money, didn't ask for it in taxes, and simply borrowed. There were banks that were willing to loan because it was governments borrowing - Eurozone governments - the risk was perceived to be minimal, so they ignored it.

The politicians offered something for nothing, the voters took it and the bankers loaned to the politicians, in a cycle of delusion that is now breaking apart - because the bankers have finally figured it out.

It isn't confined to the Eurozone either. The US is finally facing the same hiccup, the UK became close to it, all because for year in year out, governments overspent.

Some on the left will glibly blame it all on "capitalism" and "the banks". Uncontrolled growth in government spending is about as capitalist as Che Guevara. The blame banks get is for lending to governments in the first place, although you can be sure if they did not, that they'd be blamed for being "obstructive" and not "socially minded", although there are quite a few countries that find it difficult to borrow on international markets.

Certainly the bank bailouts tipped many government finances over the edge in terms of sheer debt load, particularly Ireland. However, the counter-factual is rarely argued. If banks were not bailed out, and they were allowed to collapse, and people faced their businesses, properties and deposits being lost, then would that have been preferable? I'd argue that yes, there should have been a process for the orderly collapse of banks. However, neither Bush nor Obama, nor Brown, nor Sarkozy nor Merkel, wanted to contemplate that.

The arguments about debt claim it is all about the banks, but a cursory look at public debt before the financial crisis shows that is simply untrue. Greece, Italy, the UK and the United States all had growing public debt burdens, the bank bailouts made it worse, but had the public finances for any of those countries been in a far better state - the current crisis would simply not exist.

So now there is the spectre of Western European governments asking a one-party state - the People's Republic of China - to "invest" in lending to their spendthrift governments. The idea that the Communist Party of China (which, by the way, runs an economy that has a smaller state sector than most Western countries) will take lessons or instructions that suggest liberal democracy has anything to teach it, is laughable.

The one lesson unconstrained liberal democracy is teaching the rest of the world is that in democracies voters are short term thinkers, politicians are driven by popularity and placating whatever rent seekers are the loudest - and the result is the same as if you had a teenager with a credit card seeking to be popular with his or her friends.

In other words, Europe and the United States are telling the dictatorships in China, Russia, the Middle East, Asia and Africa that their way, is the path to economic ruin.

Even those who were elected on the basis of dealing with this are largely impotent for they face the opposition from the rent seekers who benefit from the borrowing state. The Tea Party Republicans in the US who were voted in on a platform of smaller government and less tax, are finding it rather difficult to cut spending.

The political landscape of liberal democracies has evolved to be dominated by the middle ground, that which Tony Blair called "the third way", or which Bill Clinton embraced. It is naturally "conservative" in that it isn't dominated by radical reform, but is fundamentally corporatist. It tinkers with the free market, meddles with business, regulates and taxes and tries to manipulate the economy, whilst maintaining a dominant public sector role in areas such as education, health and retirement incomes. It is neither old left, nor free market "right". It did require economic growth to keep tax revenues up to sustain budget deficits, and for the Eurozone, for cheap credit to remain on tap, forever. The brief interlude of budget surpluses in the US in the late 1990s were quickly eaten up by the post 9/11 hit to economic growth, and then devoured as Bush spent up on wars, and everything else as well!

The problem with this model is that it was incapable of responding to the financial crisis, which it begat because at the heart of this model was belief that centrally managed fiat banking could deal to "boom and bust", and because in the US the tinkering was on a grand scale with Fannie Mae and Freddie Mac as the state owned mortgage guarantor, whilst banks were required to lend to those who would not otherwise be able to borrow. When this corporatist approach unwound because of the property bubble IT begat, and banks faced collapse, the "middle way" suddenly bolted to the left. Bureaucrats and politicians decided doing something was necessary, so they printed and borrowed.

The choice was to be Keynesian - or not. To be Keynesian, was to spend borrowed money and print some more, in the hope it could generate economic growth. The problem was that public debt in a few countries looked so large, that banks, who had been warned about being profligate (and faced considerable new rules on the amount of leverage they could have), could see enormous risk, particularly in parts of the Eurozone, but also the US and the UK.

Now in the Eurozone reality is hitting home. The Greek government needs to either cut spending by around 20%, or hike taxes by the same amount or some combination of either to avoid a crisis. It is unable to do so, because Greek taxpayers are fed up. Half of them are rent seekers who have been enjoying bank subsidised jobs and benefits, the rest are tax avoiders who don't want to pay for the rent seekers. Italy is little different. The German government faces telling German taxpayers to pay more because the Greeks and Italians have been living on borrowed money and they wont pay it back.

There no longer is a middle way. Either governments live within their means, cutting back or raising taxes, or other governments bail them out.

It is either less government, more free markets and more of people paying for what they use.

Or it is more government, more transfers from those who are productive (in this case Germans, but also Austrians, as well as Dutch, Finnish and French people), to those who are not.

Merkel and Sarkozy are looking for a middle way, of the banks that loaned to Greece and Italy taking a big hit, of Greek and Italian taxpayers getting less for more, and for German and French taxpayers to save their own banks. Yet even this wont wash. Obama also can't find a middle way, because he can't convince enough Americans to pay more tax, while he is unwilling to cut spending on anywhere remotely near the scale he needs to.

For the period from 1989 to 2011, it could reasonably be argued that mixed economy liberal democracies had "won" the battle of ideas, both in terms of economics, but also socially. The moral and economic bankruptcy of "actually existing socialism" was obvious, China and Vietnam already knew the economic bankruptcy of it and had started to change. The moral dimension of freedom vs. dictatorship had won, at the time. However, since then, it has been challenged.

Russia has seen some measure of economic success, coinciding with authoritarianism, as it has ridden on a wave of community price booms for energy. China has gone from strength to strength to be the second largest economy in the world. Meanwhile, Western Europe has been sclerotic, and the US, following the bubble of productivity and innovation arising from IT and telecommunications, is looking like it did in the 1970s - morose and stagnant.

The trend towards more personal freedom continues. The Arab Spring is, in one part, about that, as people throw off the shackles of dictatorships, although whether they elect their new shackles is a moot point. China too, is experiencing freedom of speech and debate unseen in over 60 years, although there are still lines that are dangerous for citizens to cross.

However, on economics, mixed "third way" economies are now seen to be wanting. It is, in part, due to fiat banking (the inflationary bubble created by printing money is only starting now to apper), but is moreso due to politicians being incapable of being fiscally prudent. In the US the debate is becoming one about whether Americans want a smaller government, with lower taxes, but less benefits/subsidies, or a bigger government, with higher taxes (for a few), more like Europe. At least there, the debate is being opened up. In Europe, the debate is yet to be entered into, but the far-left and far-right are starting to sound off where they want it to be. The far left want to squeeze business and run big governments, the far-right want to reassert national sovereignty and not pay for bankrupt foreign economies.

The centre is floundering about wanting a "solution", but given their philosophical base is neither to increase taxes, nor dramatically shrink the state - they have no clear answer to fiscal profligacy. Their bumbling attempt to discuss a financial transactions' tax being inept, and largely pandering to the far-left desire for blood, theft and destruction of the financial sector.

You see, it comes down to politicians. Most do not understand economics, let alone finance. A TV journalist some months ago asked a cross section of UK MPs what the difference is between the deficit and debt, and many had no clue. Why would anyone trust any of them to spend your money or borrow in your name?

They do not know what they are doing, and the voters do not understand what is going on, and will vote based on short term imperatives rather than long term ones.

In other words, liberal democracies can't find an answer because they are inherently incapable of making difficult decisions that must be made.

In this climate, is it any wonder that China is looking on to see the eclipse of the West and the slow withdrawal of Pax Americana from the world, as Obama withdraws from Iraq, seeks withdrawal from Afghanistan, plays a back seat role in Libya, and seems ready to leave the world to others, whilst seeking to follow the European example on economics.

The only way this will be confronted is if voters decide they will no longer expect politicians to deliver them answers, but that government should stick to what it is good at, and do less, and tax less.

The alternative is what the "Occupy" lot incoherently seem to want, which is more government, more taxes on those they don't like, to confiscate property and bugger the consequences.

You see the approach being taken now, of spending a little less and taxing a little more, doesn't deliver an environment for economic growth and more jobs, nor does it meet the demands for blood and money that the far-left are bullying for, because it maintains the corporatist state - that borrows and taxes to give privilege to some.

Meanwhile, figure out for yourself who represents what view in the New Zealand elections and in mainstream politics everywhere else. Good luck at finding those who aren't of the middle ground or the grow the government mob, or indeed journalists who can understand it at all.

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About Me

Life, liberty and the pursuit of happiness. Politics, philosophy and economics from a pro-capitalist, libertarian, objectivist perspective. Born in New Zealand, live in the UK, career has been in transport, telecommunications and infrastructure policy.